Showing papers on "Limit price published in 1997"

Do Gasoline Prices Respond Asymmetrically to Crude Oil Price Changes

Abstract: The authors test and confirm that retail gasoline prices respond more quickly to increases than to decreases in crude oil prices. Among the possible sources of this asymmetry are production/inventory adjustment lags and market power of some sellers. By analyzing price transmission at different points in the distribution chain, the authors attempt to shed light on these theories. Spot prices for generic gasoline show asymmetry in responding to crude oil price changes, which may reflect inventory adjustment effects. Asymmetry also appears in the response of retail prices to wholesale price changes, possibly indicating short-run market power among retailers.

Price Limit Performance: Evidence from the Tokyo Stock Exchange

Abstract: Price limit advocates claim that price limits decrease stock price volatility, counter overreaction, and do not interfere with trading activity. Conversely, price limit critics claim that price limits cause higher volatility levels on subsequent days (volatility spillover hypothesis), prevent prices from efficiently reaching their equilibrium level (delayed price discovery hypothesis), and interfere with trading due to limitations imposed by price limits (trading interference hypothesis). Empirical research does not provide conclusive support for either positions. We examine the Tokyo Stock Exchange price limit system to test these hypotheses. Our evidence supports all three hypotheses suggesting that price limits may be ineffective.

Price Discrimination for Pharmaceuticals: Welfare Effects in the US and the EU

Abstract: Standard analysis of the welfare effects of price discrimination for pharma-ceuticals (Scherer, F.M., "How US Antitrust Can Go Astray: The Brand Name Prescription Drug Litigation", International Journal of Business and Economics, 1997, 4, 3, 000-000) is incomplete because it presumes the optimality of marginal cost pricing, ignoring the sunk costs of RD it accounts for roughly 30% of total costs. Ramsey pricing principles imply that differential pricing related to inverse demand elasticities is the second best optimal strategy to cover the joint costs. Actual price differentials to managed care customers in the US should roughly approximate Ramsey optimal differentials, in the absence of legal constraints. In the European Union (EU), traditional price differentials between countries are being undermined by parallel trade and regulation based on foreign prices. This break down of market segmentation leads manufacturers to adopt...

Fixed fee versus unit pricing for information goods; competition, equilibria, and price wars

Abstract: Information goods have negligible marginal costs, and this will create possibilities for novel distribution and pricing methods. The main concern of this paper is with pricing of goods that are likely to be consumed in large quantities by individuals. For example, will software continue to be sold at a fixed price for each unit, or will it be paid for on the basis of usage? There is substantial evidence both from observing marketplace evolution and from surveys that customers overwhelmingly prefer subscription pricing. It turns out that even if we ignore this factor, per-use pricing is not a clear winner, and therefore when the preference effect is taken into account, subscription pricing is likely to dominate. We model competitive pricing between two companies that supply essentially equivalent services (such as movies or word processing software). One company charges a fixed fee per unit, while the other charges on a per-use basis. Each is interested in maximizing its revenue. We consider instances of the models that have stable competitive equilibria between suppliers along with situations that are unstable and, in the absence of collusion, lead to ruinous price wars.

The demand for transportation fuels: imperfect price-reversibility?

Abstract: This paper examines the price-reversibility of fuel demand for road transport. The analysis is based on an econometric model which utilizes price-decomposition techniques to measure separately the effects of different types of price increases and decreases. The methods proposed allow empirical testing of irreversibility and certain forms of hysteresis in demand relationships. The results lend strong support to the notion that consumers do not necessarily respond in the same fashion to rising and falling prices, nor equivalently to sudden and substantial price rises as to minor price fluctuations: demand is not necessarily reversible to price changes. This finding severely challenges the equilibrium basis of the traditional, reversible demand model. In the particular example used, the results indicate that consumers have reacted more strongly to the price rises of the seventies, than to other price rises, and that the resulting fuel reductions will not be totally reversed as prices return to lower levels. The results also show that, if irreversibilities do exist, the use of reversible, symmetric models will produce biased elasticity estimates, not only for prices, but for other variables as well. The methods used in this analysis should be applicable to more detailed analysis of travel behaviour, where asymmetry of response or persistence of effect may be relevant. The existence of price asymmetries will have important implications for fuel use in transport, as well as for traffic growth, and particularly for evaluating the impact of price-related transport policy. It will also affect the possibility of estimating price elasticities and forecasting demand on the basis of historic data.

Monetary Shocks and Real Exchange Rates in Sticky Price Models of International Business Cycles

Abstract: The data show large and persistent deviations of real exchange rates from purchasing power parity. Recent work has shown that to a large extent these movements are driven by deviations from the law of one price for traded goods. In the data, real and nominal exchange rates are about 6 times as volatile as relative price levels and they both are highly persistent, with serial correlations of 0.85 and 0.83, respectively. This paper develops a sticky price model with price discriminating monopolists, which produces deviations from the law of one price for traded goods. Our benchmark model, which has prices set for one quarter at a time and a unit consumption elasticity of money demand, does not come close to reproducing these observations. A model which has producers setting prices for 6 quarters at a time and a consumption elasticity of money demand of 0.27 does much better. In it real and nominal exchange rates are about 3 times as volatile as relative price levels and exchange rates are persistent, with serial correlations of 0.65 and 0.66, respectively.

"The Bigger They Are, The Harder They Fall": How Price Differences Across U.S. Cities Are Arbitraged

Abstract: Recent empirical work has made headway in exploring the non-linear dynamics of deviations from the law of one price and" purchasing power parity that are apt to arise from transaction costs. However, there are two important facets of this work that need improvement. First, the choice of empirical specification is arbitrary. Second, the data used are typically composite price indices which are subject to potentially serious aggregation biases. This paper examines the evidence for transport-cost-induced nonlinear price behavior within the U.S. We address both of the above shortcomings. First, we use a simple continuous-time model to inform the choice of empirical specification. The model indicates that the behavior of deviations from price parity depends on the relative importance of fixed and variable transport costs. Second, we employ data on disaggregated commodity prices, yielding a pure' measure of the deviations from price parity. We find strong evidence of nonlinear reversion in these deviations. The nature of this reversion suggests that fixed costs of transportation are integral to an understanding of law-of-one-price deviations.

Setting Value, Not Price

Abstract: The first task is to map benefits versus price - as the customer sees them Bear in mind that equal value doesn't mean equal market share The key decision: do you stay on the line of value equivalence, or get off? A manufacturer of high-quality medical testing equipment introduces a vastly improved version of its best-selling diagnostic device at a price 5 percent higher than that of the older model it replaces. For three months, the new model is successful, gaining rave reviews from customers and increased market share. One month later, prices in the sector collapse and the company has to discount its superior new product just to maintain its traditional market share. A highly regarded manufacturer of commercial paper prides itself on delivering extremely consistent quality and service. That consistency notwithstanding, the company is baffled by vacillations in its market share that accompany shifts from tight to loose supply in the industry. A consumer packaged goods company executes one of the most common business tactics - it matches a competitor's price on a large contract to supply a leading food retailer. In the months that follow, a bitter price war breaks out, destroying almost all of the industry's profitability in this product category. These disparate cases have at least one thing in common: apparently sound marketing strategies and tactics that produced unexpected and costly results. But could they have been avoided? Here we will explore how these and other common and expensive marketing missteps might be averted by applying a discipline called "dynamic value management" to the pricing and product positioning that are at the core of what most marketers do. "Value" may be one of the most overused and misused terms in marketing and pricing today. "Value pricing" is too often misused as a synonym for low price or bundled price. The real essence of value revolves around the tradeoff between the benefits a customer receives from a product and the price he or she pays for it. The management of this tradeoff between benefits and price has long been recognized as a critical marketing mix component. Marketers implicitly address it when they talk about positioning their product vis-a-vis competitors' offerings and setting the right price premium over, or discount under, them. Marketers frequently err along the two dimensions of value management, however. First, they fail to invest adequately to determine what the "static" positioning for their products on a price/benefit basis against competitors should be. Second, even when this is well understood, they ignore the "dynamic" effect of their price/benefit positioning - the reactions triggered among competitors and customers, and the effect on total industry profitability and on the transfer of surplus between suppliers and customers. To illuminate the nature and magnitude of this missed value-management opportunity, value needs to be defined properly. Customers do not buy solely on low price. They buy according to customer value, that is, the difference between the benefits a company gives customers and the price it charges. More precisely, customer value equals customer-perceived benefits minus customer-perceived price. So, the higher the perceived benefit and/or the lower the price of a product, the higher the customer value and the greater the likelihood that customers will choose that product. (We will return to this later.) Static value management Many marketing and strategic assessments can be made by using a simple tool called a value map, and by considering how customers are distributed within the map for a given segment. The value map explores the way customer value and the price/benefit tradeoff work in real markets for a given segment [ILLUSTRATION FOR EXHIBIT 1 OMITTED]. The horizontal axis quantifies benefits as perceived by the customer; the vertical axis shows perceived price. …

Do Daily Price Limits Act as Magnets? The Case of Treasury Bond Futures

Abstract: This article examines price behavior in the U.S. Treasury bond futures market in the mornings after large overnight price moves, using data from 1980 to 1987. The article tests whether price behavior is affected by proximity to a price limit, and whether the effect is a magnet effect or a calming effect. In that period, the price tends to reverse direction after the morning open, and the reversal appears to reflect a calming effect of the price being close to the limit. An alternative hypothesis—that morning price behavior reflects the overnight price change rather than proximity to the price limit per se—is also tested, and does not perform as well in explaining price behavior.

ADAPTIVE LEARNING vs. EQUILIBRIUM REFINEMENTS IN AN ENTRY LIMIT PRICING GAME

Abstract: Signalling models are studied using experiments and adaptive learning models in an entry limit pricing game. Even though high cost monopolists never play dominated strategies, the easier it is for other players to recognise that these strategies are dominated, the more likely play is to converge to the undominated separating equilibrium and the more rapidly limit pricing develops. This is inconsistent with the equilibrium refinements literature (including Cho-Kreps’ intuitive criterion) and pure (Bayesian) adaptive learning models. An augmented adaptive learning model in which some players recognise the existence of dominated strategies and their consequences predicts these outcomes.

Dynamic retail price and investment competition

Abstract: We develop a model of retail competition in which retailers select prices and investments in cost reduction. An equilibrium is constructed in which several identical firms enter and then engage in a phase of vigorous price competition. This phase is concluded with a "shakeout," as a low-price, low-cost firm comes to dominate the market. A central feature of the equilibrium is that low prices are complementary with large investments in cost reduction. Even though the dominant firm's price rises through time, and initially may be below marginal cost, we argue that an interpretation of predatory pricing may be inappropriate.

The Response of Local Maize Prices to the 1983 Currency Devaluation in Ghana

Abstract: This paper investigates the respective roles of spatial integration and arbitrage costs in explaining the adjustment of local prices to policy changes using the example of Ghana. We introduce a model of price formation and market integration that incorporates the price transmission process between local and central markets and also captures the implications for volatility of local prices. We explore the implications of the model for the time-path of price adjustments, as determined directly and indirectly through the marketing sector. We show that the price-adjustment process in a local market is determined by the degree of interdependence between that market and the central market in which a price-shock originates, and estimate the intertemporal and interspatial dynamics of the price adjustment process. Using data from wholesale maize markets in Ghana we find that reductions in local prices and local price variance following the introduction of economic reforms in 1983 can be traced to both local and central market forces, but that differences in the degree of market integration have important implications for long-run changes in arbitrage costs and the evolution of prices in outlying markets.

The measurement of retail output and the retail revolution

Abstract: The computerization of retailing has made price dispersion a norm in the United States, so that any given list price or transactions price is an increasingly imperfect measure of a product's resource cost. As a consequence, measuring the real output of retailers has become increasingly difficult. Food retailing is used as a case study to examine data problems in retail productivity measurement. Crude direct measures of grocery store output suggest that the CPI for food-at-home may have been overstated by 1.4 percentage points annually from 1978 to 1996.(This abstract was borrowed from another version of this item.)

Optimal Policy for a Reseller When the Supplier Offers a Temporary Reduction in Price

Abstract: A common practice in product distribution is the case in which the supplier offers a temporary reduction in price. It is suggested in the literature that in such situations, the reseller may engage in forward buying (i.e., purchasing additional stock at the reduced price offered by the supplier for later sale at the regular selling price). In this paper, a model is formulated of the reseller's response when the supplier offers a temporary reduction in price. It is assumed that the market demand for the product is elastic with respect to the selling price the reseller sets. A procedure for determining the optimal response of the reseller is developed. The model presented in this paper can easily be adapted to the case in which the reseller faces a permanent increase in the price charged by the supplier.

Does It Matter How Price Promotions Are Operationalized

Abstract: Does it matter if managers use an absolute amount or the relativepercentage discount when determining the optimal price and promotionalstrategy for a good? Intuitively, one might expect that the results ofboth models (deal amount and deal percentage) would be identical. Thisresearch shows that the deal-percentage model dominates the deal-amountmodel on three dimensions: (1) consumers pay more when an amount modelis used, (2) the seller has lower profits and different promotionalstrategies when an amount model is used, and (3) consumer behavior isunrealistically constrained by the amount model. This research showsthat whenever the seller offers a promotion in the deal-amount model,the net price paid by the consumer (regular price minus the deal) isalways higher than the net price in the deal-discount model. Thisresult implies that the ultimate price and promotional strategy (suchas depth of promotion, timing of promotions, and so on) prescribed bythe models are different. Additionally, this research shows that whenconsumers respond similarly in the models, the seller's profits arehigher in the deal-percentage model. This finding is a direct result ofthe higher net price in the deal-amount model. Finally, contrary toempirical findings in the marketing literature, the deal-amount modelrequires consumers to respond more strongly to price changes than topromotions (that is, the promotional elasticity plus one must be lessthan the magnitude of the price elasticity) for the optimal price to bepositive. The deal-percentage model does not place similar restrictionson consumer behavior.

State Dependent Pricing and Dynamics of Business Cycles

Abstract: The nature of price dynamics has long been thought important for the origin and duration of business cycles. To investigate this topic, we construct a dynamic stochastic general equilibrium macroeconomic model in which monopolistically competitive firms face fixed costs of changing the nominal prices of final goods. These prices are thus changed infrequently and discretely. The framework captures major features of the price dynamics stressed by the New Keynesian research program, particularly work on (s,S) pricing rules. However, by treating firms as heterogenous with respect to the size of fixed costs of price adjustment, we are able to study a wider range of issues than in the prior literature. For example, we explore how the nature of optimal price-setting depends on (i) the extent of persistence of variations in the money stock and (ii) the interest elasticity of money demand. Further, our model can be used to study a wide range of aspects of the positive and normative economics of monetary policy. We illustrate these topics by considering the consequences of changing the rate of inflation and by evaluating alternative policy rules.

Antitrust, Marketing Cooperatives, and Market Power

Abstract: Marketing cooperatives are common in agricultural markets This article explores their price and welfare effects and relates to antitrust legislation in the United States, the European Union, and some of the EU member states-in particular, Sweden Welfare is higher with a monopoly cooperative than with a profit-maximizing monopoly, if the scope for price discrimination is small and if the world-market price is low relative to the domestic price As the world-market price rises (or as price discrimination becomes more important), the welfare effect is reversed The price-discrimination effect suggests that, as a marketing cooperative integrates vertically, welfare may fall These results carry over to a duopoly with a cooperative firm and a profit-maximizing firm In such a duopoly, the cooperative behaves more aggressively and obtains a larger market share Empirical evidence supports these conclusions

"Price Barriers" and the Dynamics of Asset Prices in Equilibrium

Abstract: A price barrier is a price level at which a large number of investors either buy or sell securities. We analyze the dynamics of asset prices in an economy in which price barriers exist. Our analysis suggests that asset prices and volatility can exhibit jumps when the price barrier is reached. Interestingly, the market's anticipation of future trades can influence prices in the opposite direction from what one might expect. For example, when multiple barriers exist, stock prices can be inflated, rather than depressed, in the proximity of an anticipated stock sale.

Commodity Price Stabilization in a Peasant Economy

Abstract: The peasant household's preferences for price stabilization are shown to depend on observable parameters describing consumption and production decisions. A measure of willingness to pay is obtained for the case where the household is engaged in both the production and the consumption of the commodity in question. For plausible parameter values, it appears likely that the peasant household will prefer price stabilization and that stabilization of the producer price alone dominates complete stabilization.

The Interaction between a Most-Favored-Customer Clause and Price Dispersion: An Empirical Examination of the Medicaid Rebate Rules of 1990

Abstract: This paper examines the effect of the MFC rules adopted by Medicaid on both price dispersion and price levels in the wholesale pharmaceutical market Theory suggests that the regulations should reduce price dispersion and increase the average price for those products with a high initial level of price dispersion Using data which can only measure some dimensions of price discrimination, I find that discrimination falls for products sold to hospitals, but not drugstores Branded drugs facing generic competition have the most dispersion ex ante Prices of these brands rise with dispersion at the implementation of the new rules The last two results are consistent with Scott Morton (1997), where I look only at price changes due to the law The results of this paper confirm that part of the mechanism of action for the price increase is the high level of price dispersion for some products combined with the MFC

Prices, profits and exchange rates

Abstract: We use daily data to examine price responses in the Swedish gasoline market to changes in the Rotterdam spot price, exchange rates and taxes. The distribution of price adjustments by a leading retail chain, for the period January 1980 to December 1996, is symmetric with no small adjustments. An error correction model shows that, in the short run, prices gradually move towards the long-run equilibrium in response to cost shocks. There is some evidence that, also in the short run, prices are stickier downwards than upwards. Prices respond more rapidly to exchange rate movements than to the spot market price. Our analysis emphasizes that to fully understand price adjustments it is necessary to examine data sets where the sample frequency at least matches that of price adjustments.

Price stability and the business cycle: UK construction bidding patterns 1970-91

Abstract: Problems of competitive pricing and strategic management in the construction industry are discussed. A statistical analysis of tender spread patterns over the period 1970–91 shows that changing market conditions influence levels of risk exposure and in turn affect the establishment of a market-generated ‘going rate’ for construction. A pattern of increasing stability of pricing is identified during the 1980s, and this pattern is linked to developments in the strategic management of contracting organizations. Despite trenchant criticism of the sealed bid as a method of price determination, the industry's price levels do respond relatively quickly to changed economic conditions.

Can More Frequent Price Changes Lead to Price Inertia? Nonneutralities in a State-Dependent Pricing Context

Abstract: The authors present a generalized (s,S) state-dependent pricing model in which menus are changed, not just in response to price misalignment but also in response to factors such as changing product mix. Their model generates aggregate price inertia, and so reverses an important earlier result on neutrality in state-dependent pricing contexts in more general settings than previous modifications. It also provides a compromise between state- and time-dependent rules, gives a glimpse at the dynamic implications of menu cost models, and reproduces two recent results: one on Phillips curve slopes and one on asymmetric fluctuations. Copyright 1997 by Economics Department of the University of Pennsylvania and the Osaka University Institute of Social and Economic Research Association.